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January 24, 2006

Albertsons — Still Your Store, but New Owner

by Sam Savage

By Donna Hogan, The Tribune, Mesa, Ariz.

Jan. 24--Albertsons supermarkets will continue to operate in Arizona with new ownership while CVS will swallow up stand-alone Osco stores, doubling its East Valley presence, according to $17.4 billion supermarketpharmacy sale announced Monday.

Boise, Idaho-based Albertsons said it will sell itself to a consortium that includes Midwestern grocery chain Supervalu, CVS and an investor group led by Cerberus Capital Management.

Supervalu will pick up 1,124 supermarkets in the deal, none of them in Arizona. Cerberus gets 655 supermarkets and distribution centers, including all the Arizona Albertsons and Albertsons-Osco combo stores.

The Scottsdale-based national pharmacy headquarters operation goes to Cerberus in the deal. Albertsons spokesman George Sard could not say whether Cerberus would manage the operation or whether it will get scrubbed when the company breaks up. Albertsons established its Scottsdale pharmacy headquarters with about 250 employees in 1999.

The boards of Albertsons, Supervalu, CVS and Cerberus have approved the proposed transaction. Shareholders of the companies will also have to OK the deal, which is expected to close in summer.

If they approve the plan, Albertsons shareholders will receive $20.35 in cash and 0.182 shares of Supervalu stock for each Albertsons share.

Albertsons, the second largest U.S. supermarket chain, but a distant fifth in Arizona market share, put itself up for sale in September, attracting several suitors, including Fry's parent Kroger Co.

By December, the Supervalu-CVS-Cerberus deal emerged as the likely winner. But insiders reported at the time that antitrust concerns regarding the plethora of Chicago-area supermarkets from a merged operation scuttled the deal. In the transaction announced Monday, Cerberus will pick up 26 Chicago-area stores to address the antitrust issue.

If the deal gets done, it means new ownership but not a new name for 45 Valley supermarkets, 27 of them in the East Valley.

Today, Albertsons is one of four major supermarket chains operating in the state. It is the smallest, with an estimated 12 percent of the Valley's grocery market share, according to The Shelby Report, an industry publication. A fifth major Valley grocery player is Wal-Mart Supercenters. Wal-Mart scooted past Albertsons and Safeway in 2005 to gobble up 23 percent of the local market share.

Cerberus is a good manager that is likely to make Albertsons more competitive in Arizona, said Burt Flickinger, national industry expert.

"It will be a tough battle in Arizona, especially against Bashas', a formidable competitor," Flickinger said. "Some of the money losing stores may be sold to other nongrocery retailers. But it won't be like MegaFoods or ABCO (local chains that folded emptying out dozens of big-box stores). With the surviving Albertsons better run, there is more than enough business for everybody."

Nationwide, Albertsons is a much bigger player. The company operates about 2,500 stores, including Albertsons, Acme, Shaw's, Jewel- Osco and Sav- on Drugs.

CVS, which entered the Arizona market in 2002, swallowed up Eckerd's pharmacies in 2004 to nearly double its local presence. It is still a distant contender to Walgreen's. With the local Osco drugstores, it would again more than double its East Valley presence with a combined 63 stores.

CVS CEO Tom Ryan said Monday that the 700 stores the company will snag in the deal will propel CVS' growth in Southern California and other rapid-growth markets, including the Valley.

"We are picking up highvolume stores in our existing states, such as Illinois, Indiana, Missouri, and Arizona," Ryan said in a statement. "Most of the market positions we're gaining are No. 1 or No. 2 shares, and these are large and growing markets. So we are acquiring highvolume stores with valuable real estate. And, importantly, we are gaining talented associates with a track record of operating successful drug stores."

Albertsons has approximately 4,500 East Valley employees at its supermarkets, Osco drug stores and pharmacy administrative offices.